Because European courts have decided that Article 50 can be unilaterally retracted.

I was under the impression that it can be only unilaterally "retracted" (i.e., cancel brexit), but extending the negotiation required EU's agreement, which already stated that they wouldn't unless there's a concrete plan?

Yes. In practice the UK would have to ask the EU for an extension, or article 50 could be retracted and resubmitted, achieving the same thing. There would be political barriers to doing that so the EU does have some bargaining power.

The EU doesn't want the UK to leave. It would damage their project massively. It might even unravel it entirely if some other countries decide to follow in the UK's footsteps.

If the EU doesn't want the UK to leave, then its best option is the give the UK as much rope as it needs to hang itself, and pray that the UK comes to its senses, instead of giving it more time to negotiate a Brexit that will actually get parliamentary support.

"We'll hold another referendum, and cross our fingers that this time, it will vote remain" isn't exactly satisfying to the EU.